How to earn interest from crypto savings accounts?
The cryptocurrency industry has offered developers and investors the opportunity to introduce new financial tools that provide many opportunities to earn passive income. Just holding crypto has given patient investors the opportunity to make gains over the years. However, there are various other ways to increase stacks of crypto assets even in bear markets.
Aside from stakes, crypto savings accounts allow retail investors to accumulate their funds by earning interest on crypto assets they deposit on specific cryptocurrency platforms if they agree to lend the coins or tokens. Crypto interest accounts are particularly attractive because they offer much higher returns than traditional bank savings accounts, considering that the average interest rate on a crypto savings account can be up to 7.5%, compared to an average of 0.06% for bank savings accounts.
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The difference in prices between crypto and traditional savings accounts is somewhat significant, but comes with higher risks associated with the service. We will find out here how to access crypto savings accounts, the crypto interest rates and deposit terms and the risks associated with this type of financial instrument.
What is a crypto savings account?
A crypto interest account is typically a DeFi platform’s service that allows you to earn interest on digital assets you have deposited and agreed to lend in exchange for returns. This service is similar to a bank savings account that will lend your money to other customers or financial institutions for a certain period of time and will earn you interest for that service.
By definition, blockchain technology encourages users to become self-sovereign and independent of third parties. However, intermediary companies have become a necessary component of the industry offering crypto savings accounts to those who want to enjoy the benefits of the technology without putting too much effort into learning complicated and burdensome processes.
Apart from convenience, these companies will also hold some of the risks involved and ensure that depositors are paid first if adverse events such as insolvency occur. Some companies are backed by insurance and work with well-established custodians to protect their customers.
How does a crypto savings account work?
When you deposit crypto assets into a savings account, you start accruing interest from day one. Most of the popular cryptocurrencies can be used in a crypto savings account, with the most selected being Bitcoin (BTC), Ether (ETH) and Litecoin (LTC), while many favor interest on stablecoins such as Tether (USDT), USD Coin ( USDC) and PAX Dollar (USDP).
By depositing your crypto assets into a savings account, you formally give the platform the right to use your money for any purpose, from lending it to investing it or betting it on your behalf. Primarily, it will be used to lend it to earn high returns, some of which will be paid out to you as regular interest payments.
Crypto savings accounts can offer you more favorable rates if you agree to lock your crypto for a while or hold a platform-specific token. Nexo, for example, increases interest rates by up to 4% for holders of the platform’s governance token.
How to invest in a crypto savings plan?
When you want to invest in a crypto savings plan, the first step is to choose the right account for you and get started as follows:
- Choose a cryptocurrency platform you trust that offers realistic interest rates;
- Transfer cryptocurrency to this selected platform;
- Follow the few simple steps to deposit crypto assets into a savings account. Usually these steps are simple and you will be guided through the process by the platform;
- Choose whether you want to deposit your asset for a limited period of time or choose a flexible time that allows you to withdraw your crypto at any time;
- Start earning interest from day one.
As mentioned, there are many platforms to choose from, including well-established cryptocurrency exchanges such as Coinbase, with the following indications of interest on fixed savings:
Binance is the other global popular crypto platform that offers interest on many cryptocurrencies with flexible savings and locked savings options:
A growing number of other financial services companies and cryptocurrency platforms offer these types of accounts. Nexo and Crypto.com are among the companies offering higher interest rates to cryptocurrency holders who lock up assets for weeks or months. However, the downside of this type of savings account is that you cannot withdraw or sell your crypto during this period.
How much interest you can earn with a crypto savings account largely depends on the platform and cryptocurrency you choose to deposit. The interest rate offered by the service will also be driven by market conditions and is usually paid out in the cryptocurrency you have deposited.
Although their high interest rates may entice you, consider how safe your investment is with them. Choosing the best crypto interest account is not only a matter of comparing interest paid, but also making sure your investment is as safe as possible.
Remember that they are custodians of your crypto assets, which means that by holding your money, they can even stop you from withdrawing it or delay the withdrawal process, which can result in a loss for you if the value of crypto assets changes in the meantime. When choosing the best interest rates, make sure you understand the difference between the annual percentage rate (APR) and the annual percentage rate of return (APY) because they can mislead you when calculating your annual return.
Briefly, APY includes an interest compound, i.e. the addition of interest to the principal of a loan or deposit (the interest on accrued interest). On the other hand, APR does not include compound interest. Because of the interest rate factor, APY will give a higher return than APR. Nevertheless, it is always worth reading the savings account’s fine print because certain services only pay simple interest and will not give compound interest over time.
Crypto savings account risk
The crypto industry is largely unregulated, so investors may not have any coverage in case something goes wrong with their assets. In this framework, you operate crypto savings accounts that do not offer government-sponsored deposit insurance such as the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
These savings accounts offer higher returns because they are riskier. For example, they may limit how quickly you can withdraw your assets, and in times of difficulty, they may not allow customers to withdraw assets at all.
In exchange for these restrictions and the associated risk, these savings accounts are much more interesting to an investor than a regular bank account. However, for these accounts to yield such a high rate of interest, which in some cases can exceed 20%, you should wonder how your money is being used behind the scenes.
As regular banks operate under a “fractional reserve” banking service, so do most crypto companies. They lend more than they have to financial institutions with the difference that there is no deposit insurance to cover them, as in the case of traditional banks.
Crypto Savings Accounts vs. Crypto Wallets
Crypto wallets will simply not accumulate your holdings of cryptocurrency, unlike crypto savings accounts that are created to increase the number of coins you own over time.
This however, may come at the expense of key ownership, because the private keys that allow you to access your coins are maintained by the crypto platform. On the other hand, most crypto wallets will ensure that you retain full ownership of your private keys.
Security is another concern that should be addressed very carefully. There are security risks in the centralized platform that holds your private keys because it could potentially become insolvent, bankrupt or hacked and you could lose your money.
Similarly, you should choose a wallet carefully to avoid choosing a service with little security and vulnerability to hacking. You must also ensure that you can easily access your wallet’s private keys if you lose your operational device and need to recover your assets in another digital location.
Cryptocurrency is a work in progress and will likely undergo continuous changes over the years, especially in terms of regulation, which will also affect how crypto savings accounts are managed. In June 2022, the problems with leading crypto lending platforms such as Block.Fi and Celsius have raised further concerns about the future of crypto savings accounts and similar related cryptocurrency services.
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Caution and due diligence is always advised if you are considering opening a crypto savings account and weighing the associated risks against the chances of high returns, especially if you are risking your life savings or something close to it.
